Ever since sharing economy companies burst on to the scene, there have been disputes between governments, like the State of California, and companies, like Uber, about the employee/contractor classification of its workers.
None of these policies are good for the long-term of labor in America. They massively discourage entrepreneurs from building business that revolve around human workers, and they accelerate the transition to a job-lite world that is built on robot, not human, labor.
Why Does the Employee/Contractor Distinction Even Matter to a Business?
Businesses financially contribute to society and the social contract in two main ways:
Contributions Solely Linked to Profitability
Businesses and their owners are taxed on profits – this is generally fair, predictable, and an easy hit to take because you are in a “partnership” with society. When you win, you give something back. When you don’t win, you can keep trying but you don’t owe anything extra.
Contributions Solely Linked to Having “Employee” Workers
Businesses provide social benefits to workers classified as “employees”, regardless of profitability. These include:
- Health Insurance
- Unemployment Insurance (and Employee Training Tax)
- Increased (and unflexible) protections regarding the structure of work
These expenses are more burdensome and less fair because:
a) Your contribution is not linked to profitability – you pay more because you’ve created more jobs.
b) You are arbitrarily paying for parts of the social contract that have nothing to do with business:
Health Insurance – Every person in America (and on the planet) needs health insurance. They also need food, transportation, shelter, internet access, and a mobile phone. Why has business randomly been assigned to pay for one of these? Healthcare is the responsibility of the individual or the government (if the people decide so) – employers should have nothing to do with this added expense, and it is a deterent to hiring employees.
Unemployment Insurance (and Employee Training Tax) – Unemployment insurance and employee training are social safety nets that help those who lose their jobs, and employers fund the program. Social safety nets are part of the contract between the people and the state, so they should be paid for by taxes, not by tied to employees. Forcing employers to pay these taxes implies that the state is granting the business the privilege of employing its citizens and demanding tribute. This attitude is dangerous in a working with accelerating technological change. UI taxes effectively fine a business for creating a job for a worker classified as an employee.
c) They make your expenses less aligned with revenues:
Employee regulations define how many hours someone can work, overtime and break rules, and minimum wages to pay. They require employers to pay payroll taxes on behalf of employees, which confuses employees about their actual compensation and the taxes they pay. Regulations require businesses to buy worker’s comp insurance and reimburse workers for mileage.
All this adds up and makes it much more difficult for a business like Uber to align what a driver gets paid with the revenue they have received from that ride.
If a driver is a contractor, this is the deal: “you make Uber $10, and we give you 80% of that $10, which is $8”.
If the driver is an employee, this is the deal: “you drove for 20 minutes at an hourly rate of $12/hr, which really costs us $13.20 after payroll tax. Plus you drove 5 miles, so we need to reimburse you at $.53/mile, and we also need to pay our insurance company an additional $.12/mile…so altogether it cost us $7.61, of which you are getting paid $4/hr pre-income tax (but post- payrolltax), plus a non-taxable reimbursement of $2.65. We also need to consider that you might have driven four hours in a row, which means you are required to take a break…and you can’t have driven more than eight hours in the past 24 hours, or else we are required to pay you overtime (which we can’t afford to do), so even though you want to work more for the going rate, you can’t.”
Which of those arrangments makes it easier to run a massively complicated business with a two-sided marketplace that employs millions of people?
But How Does Labor Policy Impact Humans on a Larger Level?
Automation, software, and robots have already put a huge dent in certain types of employment in the US, like manufacturing. Walk around the Tesla plant – it is a beautiful piece of industrial scale, automated, nearly humanless art.
The world is already trending away from the large scale human employment needed in the past, and here is why:
Venture capitalists and entrepreneurs, striving to build the big new businesses of the future, obsess about “scalability” – VC-speak for “can this get really big, really quickly, without turning into shit along the way?”
Unfortunately, human workers “scale” very poorly– they are hard to hire, hard to keep motivated, hard to keep producing a consistent product, and hard to get to work together. Humans are complicated, complex creatures, and the more humans involved, the more likely you have to have chaos. And succeeding in business is about removing complication, chaos, and complexity.
The best way to make a business scalable is to make it dependent on robots (software or hardware that do tasks) instead of humans. This is why you don’t see the most ambitious entrepreneurs starting law firms, massage therapists, doctor’s offices, or other service businesses dependent on human workers – they start the companies that make the software to help these businesses run.
When new companies are created, entrepreneurs build their businesses with the fewest possible human workers, utilizing the newest and best software/robots. This new combination, when successful, is far more productive than the robots and humans at older companies. As these new companies gain traction and scale, the old companies scramble to replace their old robots with these new robots and use fewer human workers in order to be competitive.
Entrepreneurs and investors acting rationally, in pursuit of their own survival, do not drive us towards a world of “full” human employment.
The Sharing Economy – Entrepreneurs’ Last Attempt to Substantially Create Human Work
Despite the disadvantages of human workers, like their natural humanity and the potential government regulations attached to them, there are very necessary services humans can provide in a way that is superior to robots. Humans can drive cars, cook food, babysit puppies, fix your sink, and they can be nice.
In the past decade, entrepreneurs realized they could build large, sustainable businesses facilitating the delivery of these services if they could solve these three big problems:
- Remove the friction between humans who provide services and clients who wanted those services
- Scale the cost/supply side (service providers) of these marketplaces up and down in a capital efficient way, where labor costs correlate directly to revenues
- Ensure that those services provided consistently high quality so that clients would repeat purchases and have high customer lifetime values
Companies like Uber, Lyft, Rover, and Instacart mastered problems 1-3, and the “Sharing Economy/Collaborative Marketplace” concept was born.
Problem #1, removing friction, is a marketing, design, and operations issue that is incredibly difficult to solve, but it has nothing to do with the government.
Problem #2, scaling supply and demand in a capital efficient manner, is where it gets tricky and government regulations get involved. To solve problem #2, sharing economy companies need the humans providing services to be flexible, low risk, and have predictable costs that completely align with revenues (e.g. contractors, not employees).
Having flexible contractors instead of employees is the difference between having Just-in-Time inventory versus ordering massive amounts of inventory upfront and keeping it in a warehouse. The capital required and risks incurred from the “inventory-heavy” model would make a new idea like Uber totally unfundable because it would only become profitable at crazy scale and product-market fit.
Problem #3, ensuring consistently high quality, is where necessary business practices run face first into the spike that is burdensome government regulation.
Unfortunately, ensuring that the services delivered at a consistent high quality requires businesses to treat workers in a way that government labor laws consider to be like an employee. Any time a business provides any guidance to a worker about how to perform their job, the government tends to see that as resembling an employer/employee relationship.
So, if Uber requires its drivers to drive a certain car, keep it clean, drive safe, and kicks drivers off the system who don’t act in a certain way that drives high ratings, the government can interpret that as control, and classify the drivers as employees.
Complicating the matter – even if Uber and its drivers both agree the driver is a contractor, and Uber has no control over its individual drivers, the government can still decide that drivers should be classified as employees. Because Uber is primarily in the business of providing paid rides, prior rulings initially decided that this means it effectively has control over the drivers, and they are actually employees.
In this debate over classification, the government is the judge, jury, and executioner, and the laws are extremely subjective. The government functions as a de facto mob boss and “win” if it wants by classifying a worker as an employee, and only the wealthiest companies (like Uber) can afford to fight back.
I’m sure Uber was aware of this issue the entire time but went with the “it is better to ask forgiveness than permission” strategy. By the time regulators finally got involved, Uber had assembled a huge war chest of political, financial, and social capital. Now they will go head to head with the government over the issue, which will hopefully end up in the Supreme Court.
So, Where Does This Leave Us?
Uber could be fine, I think, because even if they have to completely change how they do business and hire a fleet of employee drivers, they have enough demand and liquidity for the business model to work. They also have a huge pile of cash and have already started working in earnest towards autonomous.
However, for entrepreneurs and investors on the whole, the Uber/Instacart/Homejoy cases scare the shit out of them, and this is a big problem if we want companies to create job for human workers.
If you are currently running or invested in a sharing economy company that uses contractors, you are nervous and making contingency plans.
Instacart converted their contractors to employees in 2015, even though it probably made their business less competitive and will require more capital to scale.
Homejoy went out of business in 2015, and one of the reasons they had trouble raising money was allegedly because investors were nervous about the government ruling that home cleaners needed to be classified as employees.
If you are thinking of starting or funding a sharing economy company that might run afoul of zealous employment regulators, you are saying “Fuck this, I’m building an app or a software as a service company. Why bother with the risks of scaling a business built on human workers?”
And if you are Travis Kalanick, the CEO of Uber, you say “Fuckkkkkk this, let’s try to get driverless cars by 2020, not 2025.”
The government’s willingness to prosecute this argument sends a huge message to you – “Forget building companies that involve human workers, just focus on building better robots.”
Sharing economy companies like Uber are the last hope for large scale human job creation, and instead of celebrating the millions of jobs Uber has created around the world, the government pokes their thumb in Uber’s eye and demands tribute.
Unfortunately the government is like a local bully who flexes his muscles by stealing the DVDs out of your mailbox, completely unaware that you’ll just start getting your movies online.
Entrepreneurs and investors won’t stop building and funding businesses, they’ll just stop building and funding business that involve lots of human workers. They will be fine, the workers who miss out on these jobs will not, and western governments are not prepared to administer an increasingly job-lite world.
Western governments have two options moving forward:
1) Get real and absorb the fact that they are no longer the powerful mob boss they used to be. And do it quick. Entrepreneurs and investors don’t need human workers to thrive, and the robots are getting better every day.
Governments need to make it attractive to hire humans instead of robots, not just neutral and try to keep employment up as long as you can.
Stop pushing state social contract obligations on to businesses through the “employee” distinction. Update worker classifications so that they are predictable and reflect the modern “sharing economy”. Instead of increasing minimum wage, increase the Earned Income Tax Credit and get the courage to tax the super-rich to pay for it.
2) Decide that it is ok with robots replacing humans and 30%+ unemployment rates. Revise the social contract, bring up the safety net significantly, and use robots to counter-balance aging populations where fewer workers are needed to support more people. Get serious about population control, and sedate people with virtual reality, so they don’t cause social unrest.
A job-lite future, administered by an ill-prepared government, is no good for anyone. We need to take the blinders off and chart a course that balances our employment goals as a society with economic and technological realities.